As discussed in our prior Alert, the Massachusetts Legislature has been considering legislation focused on reforming non-compete covenants. The Legislature has now passed a major overhaul of non-compete law, known as the “Massachusetts Noncompetition Act.” Assuming Governor Charlie Baker signs the bill, it will apply to noncompetition agreements entered into on or after October 1, 2018. This Alert summarizes the key provisions of the Act.
What is a noncompetition agreement?
The Act imposes minimum requirements that noncompetition agreements between employers and “employees” (broadly defined to include independent contractors) must meet to be valid and enforceable. For purposes of the Act, a “noncompetition agreement” means:
an agreement between an employer and employee, or otherwise arising out of an existing or anticipated employment relationship, under which the employee or expected employee agrees that he or she will not engage in certain specified activities competitive with his or her employer after the employment relationship has ended.
Notably, non-disclosure/confidentiality agreements, invention assignment agreements, employee non-solicit/no-hire provisions, and covenants not to solicit or transact business with customers, clients or vendors are not “noncompetition agreements” governed by the Act. Likewise, noncompetition agreements made in connection with the sale of a business are not covered (provided the signatory is a significant owner of the purchased business and will receive significant consideration from the sale), nor are noncompetition agreements made in connection with an individual’s separation from employment (provided the employee is expressly given seven business days to rescind acceptance).
Are noncompetition agreements with certain categories of employees prohibited?
Yes. The Act provides that noncompetition agreements are automatically unenforceable against four categories of employees: (1) employees who are considered non-exempt from overtime under the federal Fair Labor Standards Act; (2) undergraduate or graduate students who enter into an internship or other short-term employment relationship while enrolled in school; (3) employees age 18 and younger; and (4) employees who have been terminated without cause or laid off. The Act does not define the terms “without cause” or “laid off,” but Massachusetts cases arising in other contexts have defined the related terms “good cause” and “just cause” quite broadly from the employer perspective.
What requirements must noncompetition agreements meet to be valid and enforceable?
Noncompetition agreements must meet a number of requirements to be valid and enforceable, including the following:
- An agreement signed in connection with an employee’s hiring must be in writing and provided to the employee by the earlier of a formal offer of employment or 10 business days before the start of employment. As a practical matter, this means that an employee cannot begin working for 10 business days after receipt of an offer if the noncompetition agreement is to be enforceable.
- An agreement entered into after the start of employment, but not in connection with separation from employment, must be supported by “fair and reasonable consideration independent from the continuation of employment,” and notice of the agreement must be provided at least 10 business days before it is to become effective. The Act does not define the term “fair and reasonable consideration,” but it certainly requires more than a de minimus benefit. One potential option is a signing bonus directly attributed to the noncompetition agreement that is large enough to be (at least arguably) “fair and reasonable” under the circumstances.
- The agreement must be in writing, must be signed by both the employer and the employee, and must expressly state that the employee has the right to consult with counsel prior to signing.
- The agreement must be supported by a “garden leave clause” or “other mutually-agreed upon consideration between the employer and the employee, provided that such consideration is specified in the noncompetition agreement.” A garden leave clause is an employer’s agreement to pay an employee on a pro rata basis during the non-compete period at least half of the employee’s highest annualized salary in effect during the two years preceding the employee’s termination. Notably, the Act does not require noncompetition agreements to include expensive garden leave provisions. Mutually-agreed upon alternative consideration is acceptable, and the Act does not specify the amount or type of such consideration. That said, it does appear that noncompetition agreements signed at the start of employment likely need to be supported by some consideration above and beyond the mere hiring of the employee. An upfront agreement to pay an employee a lump sum at the time of separation from employment, for example, may suffice.
- The restricted period may not exceed 12 months from the end of employment (except the period may be extended to up to two years from the end of employment if the employee has breached his or her fiduciary duty to the employer or has unlawfully taken, physically or electronically, property belonging to the employer).
Apart from these specific requirements, noncompetition agreements must be reasonable in all respects and consonant with public policy, as is required under existing common law. The Act specifically provides that noncompetition agreements must be (1) no broader than necessary to protect the employer’s legitimate business interests in trade secrets, confidential information, and/or goodwill; (2) reasonable in geographic scope relative to the interests protected; and (3) reasonable in the scope of proscribed activities relative to the interests protected.
The Act creates certain presumptions of reasonableness. For example, a noncompetition agreement will be presumed reasonable in geographic scope if it is limited to the areas where the employee provided services “or had a material presence or influence” at any time during the last two years of employment, and it will be presumed reasonable in scope of proscribed activities if it is limited to the specific types of services provided by the employee at any time during the last two years of employment.
Can a court reform an overbroad noncompetition agreement?
Yes. As under existing law, a court may reform or revise an overbroad noncompetition agreement to render it valid and enforceable to the extent necessary to protect the employer’s legitimate business interests.
Can employers avoid the strict requirements of the Act with choice of law and forum selection clauses identifying a state other than Massachusetts?
No. The Act states that any choice of law provision that would have the effect of avoiding the requirements of the law is not enforceable “if the employee is, and has been for at least 30 days immediately preceding his or her cessation of employment, a resident of or employed in Massachusetts at the time of his or her termination of employment.” Additionally, the Act requires that all civil actions relating to covered noncompetition agreements shall be brought in the county where the employee resides or, if mutually agreed by the employer and employee, in the Superior Court of Suffolk County. It is not clear whether this provision is an attempt to limit enforcement of noncompetition agreements in federal court (for example in diversity cases), which may be subject to challenge.
What Should Employers Do Now?
Assuming the bill is signed by the Governor, employers should promptly review and revise any form noncompetition agreements to be used after October 1, 2018, and determine what consideration to offer employees in connection with such agreements. Employers may also wish to consider whether noncompetition agreements are necessary for certain employees or whether the same objectives can be achieved with other restrictive covenants outside the scope of the Act, such as provisions prohibiting solicitation of and doing business with customers. Employers should also review their hiring processes and severance agreements to maximize the enforceability of noncompetition agreements.
If you have any questions regarding this legislation, please feel free to contact the author of this Alert, Jennifer Belli, jbelli@bellowelsh.com. Jennifer is a partner with the Boston law firm of Bello/Welsh LLP, a FordHarrison affiliate law firm. Of course, you may also contact the FordHarrison attorney with whom you usually work.